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New SEC Proposals on Leveraged ETFs Don’t Go Far Enough, Officials Argue

Commissioners Jackson and Lee are at it again, urging commenters to help the agency strengthen a new proposal on the use of leveraged and inverse funds.

The Securities and Exchange Commission proposed a rule package earlier this week regulating the use of derivatives by funds to obtain leverage and the sales of such products, including leveraged and inverse ETFs, which have been scrutinized the past couple of years by regulators. But SEC Commissioners Robert J. Jackson Jr. and Allison Herren Lee said the proposal does not go far enough.

In a statement, the commissioners said they support the proposal but urge commenters to help the agency strengthen it.

For one, they ask for evidence about whether the rules adequately protect investors in the sales of these products. They’re often sold as long-term investments, when they’re really more appropriate for sophisticated traders, Jackson and Lee say. The proposal aims to address that problem, but the commissioners believe it can go even further in protecting investors from the risks.

Jackson and Lee also argue that the proposal should go further in board-level engagement at these funds that use derivatives, saying that hiring a risk manager is not enough.

Lastly, the proposal relies on value at risk (VaR), an industry metric used to measure financial risk in a fund over a period of time.

“We believe that the Commission should consider further measures to ensure that funds’ VaR models are reliable and not subject to opportunistic gaming,” the statement said.

This isn’t the first time Jackson and Lee have stirred things up at the SEC. They recently put out a statement raising concerns about the new nontransparent active ETF structure, which the SEC has given a nod to. Commissioner Jackson was the only one to dissent in the vote for Regulation Best Interest, approved in June, raising concerns that it watered down the existing fiduciary standard for registered investment advisors.

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